The Public Interest

The politics of public pension funds

Roberta Romano

Spring 1995

IN most large U.S. corporations, the owners are passive investors who do not run the business. This creates an agency problem, allowing the managers to operate the business for their own ends, not the shareholders’.  In the 1980s, corporate takeovers tended to mitigate the agency problem. Poorly performing managers were threatened with replacement by new owners who were willing to pay the shareholders a premium to take control of the firm in the expectation of increasing profits. With the lull in takeover activity in the 1990s, commentators concerned about corporate performance have sought alternative mechanisms to discipline management; the most prominent strategy is to encourage institutional investors to be more active in corporate governance. 

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